CHILE: ECONOMIC HIGHLIGHTS WEEK OF NOVEMBER 17

UNCLAS SANTIAGO 001024 STATE PLEASE PASS TO USTR KATE DUCKWORTH STATE PLEASE PASS TO FEDERAL RESERVE TOM CONNORS TREASURY FOR SSENICH COMMERCE FOR KMANN SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI SUBJECT: CHILE: ECONOMIC HIGHLIGHTS WEEK OF NOVEMBER 17 REFS: SANTIAGO 1011 AND PREVIOUS ¶1. SUMMARY: This continues a series of regular updates on major developments in Chile's economy since the acceleration of global financial turmoil. By week's end, November 21, there were decreases across the board in copper prices, the exchange rate, and the stock market. Chilean exports dropped by 6.2% in October. Large investment projects have been suspended and investment is forecast to fall in 2009. A strike by public sector employees had caused significant export losses. The GOC's agreement to raise wages for government workers was not expected to have a direct impact on inflation. The Central Bank is continuing to offer currency swaps to maintain liquidity. The state-owned BancoEstado is offering incentive mortgages to help spur housing starts. END SUMMARY. Copper Prices Decrease -------------- ¶2. Copper prices on the London Metals Exchange closed at $1.57/pound on November 21, down 6.5% from their close on November ¶14. Copper prices hit their lowest point in three and a half years during the week, bringing the average price for November to about $1.70/pound. ¶3. Chile's state copper company, CODELCO, announced November 18 it will focus on preventing losses due to the continuing fall in copper prices. The steps will include: cost control measures, austerity and fiscal discipline, suspending the hire of new workers, and revision of existing contracts. Experts now project that copper prices will not be high enough to cover the GOC's 2009 budget, with some forecasting a 1% budget deficit next year. Chilean Peso Depreciates Against Dollar -------------- ¶4. On November 21, the exchange rate closed down sharply (by almost 20 pesos) at 683 Chilean Pesos to 1 U.S. Dollar (a depreciation of 6.7% from its close on November 14). During the day, the peso reached a 5-year low. Significant Losses In The Stock Market -------------- ¶5. The IPSA closed at 2369.65 points on November 21, down more than 7% on the close of November 14. The IPSA has lost value for five days in a row. Exports Drop In October -------------- ¶6. Data from Chilean Customs shows exports decreased by 6.2% in 
October 2008 when compared with the same month in 2007 (a decrease of almost $400 million). The drop is blamed on reduced copper shipments (down by 20%) due to lower demand (reflected in lower copper prices). Copper still accounted for 61% of exports. Exports also decreased because of a fall-off in demand from several key trading partners. Exports to the U.S. dropped by 30% (the U.S. was Chile's second top export destination in 2007),and exports to Canada dropped by 50%. Large Investments Postponed, Projections Fall -------------- ¶7. The Chilean Corporation of Capital Goods (Corporacion de Bienes de Capital - CBC) reported that 19 major investment projects in Chile have been suspended due to effects of the financial crisis (involving investments estimated at $2.36 billion). Construction projects accounted for 17 of the 19. Latin America Consensus Forecast projected a sharp drop in investment, with gross fixed capital formation forecast to grow 16.8% in 2008 but only 1.9% in ¶2009. Effects of Government Strike -------------- ¶8. A four-day strike by public sector employees caused significant disruption to public services (most notably trash collection) across Chile. It ended November 20 when the Chilean Congress approved a compromise between the GOC and public sector unions for a 10% raise in wages. Government employees had originally demanded a 14% raise, ostensibly because of Chile's relatively high inflation. Some experts estimate that Chilean exporters lost over $1 billion as result of the strike, which paralyzed Customs operations across Chile (and occasioned some frantic calls by U.S. exporters to the Embassy and the Department). However, the raise for public sector employees was not expected to have a direct impact on inflation. Central Bank Continues Currency Swaps -------------- ¶9. The Central Bank continued to offer currency swaps to help maintain adequate levels of liquidity in the banking system. The Bank offered $500 million on November 18 for 63 days at LIBOR + 106 basis points. Banks opted to use only $100 million. State Bank Offers Incentive Mortgages -------------- ¶10. On October 18, BancoEstado (state-owned bank) signed a deal with 30 real-estate companies across the nation. Under the agreement, BancoEstado will offer 30-year mixed-rate mortgages at 3.9% for the first 36 payments, for up to 90% of the assessed value of the home. The mortgages will only be available for new homes and are designed to spur housing-starts (negatively impacted by the global financial crisis). The mortgages will be made available largely from an injection of funds from the Government (see Santiago 989). SIMONS